Two tax-deferred retirement plans designed especially for small businesses and their employees are SIMPLE IRAs and SEP plans.

This is a variation on the traditional individual retirement account, allowing significantly higher tax-deferred contributions to encourage retirement savings. The plan is primarily employee-funded with employer matching contribution requirements. The employer has two options: it may match up to 3 percent of an employee’s contribution, if any. However, the employer match can drop to 1 percent in any 2 of 5 years. Alternatively, the employer may make a flat 2 percent contribution on behalf of all eligible employees (whether they contribute or not), instead of the matching arrangement.

SIMPLE IRAs are limited to companies with fewer than 100 employees. An employee’s contribution, in the form of a current salary reduction, is limited to $11,500 per year for 2009 and 2010. The law also allows taxpayers age 50 and above to make an extra "catch-up" contribution each year of $2,500.

The simplified employee pension is an employer-sponsored plan designed to help small businesses provide greater retirement benefits to their employees than those available through the SIMPLE IRA. With a SEP, the employer contributes directly to the IRA of each participating employee.

There are higher contribution limits in a SEP than in a SIMPLE. Employers may contribute up to 25 percent of earned income or $49,000 per year for 2009/2010, whichever is less, on behalf of the eligible employees.

Employee contributions to a newly created SEP are no longer allowed. However, SEPs established before 1997 may allow employee contributions of pre-tax income, up to certain maximums.

Both the SIMPLE and SEP plans bring the benefits of employer-sponsored retirement programs to the employees of small business.